Henry expert slams Labor super threats

Tony Abbott said the Coalition would oppose any changes to superannuation but would not guarantee reversing them if elected. Photo: Andrew Meares

Katie Walsh

Expert commentary

Hewett | As political strategies go, super is rapidly turning into another Gillard government debacle – and a spectacular one even by recent standards.

Opinion | Once again the commonwealth government appears to be looking at another set of inconsistent fiddles with the taxing of superannuation, when it could try a logical and comprehensive reform that would earn bipartisan support and simplify the rules for savers.

A member of the Henry tax review has rejected the federal government’s claims that tax breaks for superannuation are unsustainable and warned that threats to wind them back in the budget put key aims of the system at risk.

University of NSW economics professor John Piggott said threatened changes to superannuation put at risk the “highly redistributive” system that provided income protection for the poor in old age and offered a modest standard of living that “most countries in the world would die for”.

“The idea that it’s not sustainable is not sustainable,” Professor Piggott said.

He was backed by University of Melbourne economics professor John Freebairn who said Treasury analysis that superannuation tax breaks cost $32 billion a year were nonsense because they failed to consider that savers would shift to other tax-effective strategies, such as negative gearing, in response to any changes.

Some might argue that paring back super concessions might “kick off another property boom”, he added.

The government is expected to cut super tax breaks in the budget for those on higher incomes to help fund education and disability policies.

Smith says most income earners won’t be touched

Defence Minister Stephen Smith, a member of the expenditure review committee, said on Monday that super was being targeted in the budget but most income earners would be untouched.

He argued that with the revenue lost on super tax concessions now the largest source of revenue foregone for the government, super needed to be kept “sustainable over the long term to the benefit of the vast bulk of Australians’’.

But Treasury’s estimate of the cost assumes funds would otherwise sit in a bank deposit account and attract tax at the marginal rate, a scenario experts reject.

“Most savings are in your own home, there are only a few per cent in financial deposits.”

They said investors would shift their money into buying bigger and better homes – tax-free when ultimately sold – or investment properties, which benefit from tax deductions costing $5 billion a year.

“The effective tax rate on property is negative,” Professor Freebairn said. “The crude numbers they take out of their tax expenditures are probably double what they would likely get.”

The Association of Superannuation Funds of Australia agrees, saying a true estimate of the super tax breaks would be about $16 billion, not $32 billion.

Warning on behavioural change

That accounts for funds leaking into tax-beneficial investments such as negative gearing and savings from not having to pay as much in the age pension.

Rice Warner actuaries said a key flaw in the Treasury estimates was they did not allow for any behavioural change, “since people will find other ways to minimise their taxes if concessions are removed”.

Professor Freebairn, a member of the business tax working group that advised Treasurer Wayne Swan to leave the business tax system alone, said “tinkering” wouldn’t raise the kind of money Labor needed.

He called for a system that would prove hard for future governments to interfere with and possibly garner bipartisan support, such as by taxing contributions at the marginal tax rate – raising another $13 billion a year – and scrapping taxes on earnings once that money was in the superannuation fund.

His model is close to that suggested by the Henry tax panel in its 2010 review, which suggested taxing contributions at the marginal rate, less a flat level of discount and taxing earnings at 7.5 per cent.

Professor Piggott said constant tinkering – or threats to tinker – with the super system had increased uncertainty, particularly for those who relied upon more than just the age pension.

Piggott says system is sustainable

“They face a lot of uncertainty anyway – in investment, employment, longevitiy – so why are we adding more?

“That’s what all this unfortunate debate about the taxation of superannuation is placing at risk – that very sound second pillar.”

While Professor Piggott said he would like to see a considered review of possible changes, including the Henry recommendations, in its existing form it was sustainable, contrary to government and Treasury claims.

“The scheme is pre-funded,” he said. “We haven’t made generous income replacement promises such as many European and North American systems do.”

If revenue fell short, there were plenty of taxes the government could raise, he said. These included possibly raising marginal tax rates for high-income earners and increasing the 10 per cent goods and services tax rate, which was significantly lower than equivalent taxes overseas.

Slashing super concessions instead was “costly in terms of the credibility of the retirement system we’ve built here”, he said.

Former Labor minister Simon Crean said on Monday that Labor needed to frame the debate about sustainability rather than making an assault on high-income earners.He also said any changes must not be retrospective, meaning any increased taxes must not apply to existing savings which have been subject to a 15 per cent tax rate. “People have invested on that basis. You can’t claw that back retrospectively,’’ he said.

‘Irrational’ subsidies built into system

Monash University professor Rick Krever said that two of the three key subsidies built into the super system – a lower tax rate on contributions and earnings, at least for those on income rates above 15 per cent – may be “irrational”.

But they “may be sustainable if you cap the amount that can be saved this way”, he added.

Currently, caps limit the amount of contributions possible in any given year – $25,000 from an employer or as a self-employed person, and $150,000 as a personal contribution.

Mr Krever said that the third subsidy – the zero tax rate on earnings in the pension stage – was “completely irrational and unfair, but fairness has never played a significant role in the government’s tax policy”.

That one was “probably not sustainable”, he added.

“As a growing percentage of the population switch over to withdrawals from their retirement savings accounts, the pool of untaxed income will keep growing.

“The only way to fund this subsidy will be to raise the tax rates on those still working to truly unfair levels so the workers subsidise the wealthy retired.”